Gift Cards and Taxes
Gift cards have topped wishlists for 13 years in a row, according to the National Retail Federation. Your employees like to choose how they spend their hard-earned remuneration. This desire — combined with the Tango Card making it easy to send and track rewards — makes gift cards a win-win business solution. But uncertainty about gift card taxes can be a concern for some professionals.
Yes, generally, gift cards are considered a taxable income. This taxable income is subject to federal and state income tax withholding, unemployment tax, and FICA taxes. This includes prizes, bonuses, awards, incentives, and rewards.
According to the IRS, gift cards that are redeemable for general merchandise or have a cash equivalent value are not de minimisfringe benefits and are taxable. Typically, gift cards do not fall under this category.
Gift cards to customers, vendors, and suppliers have their own set of rules. In general, “thank-you” gifts are deductible by a business up to $25 per person. Gift cards are typically not considered taxable income to the recipient, however, every situation is different.
Gift Card Amount.
Gift Card Type – Is it a retail card or a cash equivalent prepaid card?
Type of Program – Employee Recognition, Rebates, Customer Loyalty, etc.
Many businesses reward employees with branded products such as backpacks and hoodies, mugs and notebooks. But even something as simple as a T-shirt can come with unexpected costs. By the time you paid the extra price to print your logo on T-shirts, covered the shipping costs, and paid the additional cost to ship the T-shirts to multiple addresses, these seemingly simple things have increased your budget by at least 6%.
Remember, this number does not consider the time your marketing team spent creating and approving a branded t-shirt design or your HR team's time creating spreadsheets, updating employee addresses, and generating reports. When you compare the total value of branded items to the value of gift cards, including taxes, the amount is often comparable. However, with gift cards, you spend far less time and effort coordinating logistics and more time giving rewards that are truly valuable to your employees.
Our company rewards employees with gift cards to boost morale, celebrate milestones, and encourage participation in various activities. We pay taxes so that employees can use the entire balance on the gift card. We do gross settlement, which means we add the gift card's value—plus additional taxes—to the employee's salary. Although the amount is listed on the employee's check, it is not paid to the employee, resulting in a zero-sum impact.
As you can see, there are many different ways to earn rewards. Whether a reward is taxable or not will depend on the situation at hand. Consult your tax advisor on specifics that apply to your company and program.
Are gift cards taxable?
Yes, generally, gift cards are considered a taxable income. This taxable income is subject to federal and state income tax withholding, unemployment tax, and FICA taxes. This includes prizes, bonuses, awards, incentives, and rewards.
Are gift cards considered a de minimis fringe benefit if they are under a certain value?
According to the IRS, gift cards that are redeemable for general merchandise or have a cash equivalent value are not de minimisfringe benefits and are taxable. Typically, gift cards do not fall under this category.
What about gift cards gifted to a customer as a “thank-you”?
Gift cards to customers, vendors, and suppliers have their own set of rules. In general, “thank-you” gifts are deductible by a business up to $25 per person. Gift cards are typically not considered taxable income to the recipient, however, every situation is different.
What factors determine whether a gift card is taxable?
Gift Card Amount.
Gift Card Type – Is it a retail card or a cash equivalent prepaid card?
Type of Program – Employee Recognition, Rebates, Customer Loyalty, etc.
Putting gift card taxes in perspective
Many businesses reward employees with branded products such as backpacks and hoodies, mugs and notebooks. But even something as simple as a T-shirt can come with unexpected costs. By the time you paid the extra price to print your logo on T-shirts, covered the shipping costs, and paid the additional cost to ship the T-shirts to multiple addresses, these seemingly simple things have increased your budget by at least 6%.
Remember, this number does not consider the time your marketing team spent creating and approving a branded t-shirt design or your HR team's time creating spreadsheets, updating employee addresses, and generating reports. When you compare the total value of branded items to the value of gift cards, including taxes, the amount is often comparable. However, with gift cards, you spend far less time and effort coordinating logistics and more time giving rewards that are truly valuable to your employees.
Consider your approach to paying taxes on gift cards
Our company rewards employees with gift cards to boost morale, celebrate milestones, and encourage participation in various activities. We pay taxes so that employees can use the entire balance on the gift card. We do gross settlement, which means we add the gift card's value—plus additional taxes—to the employee's salary. Although the amount is listed on the employee's check, it is not paid to the employee, resulting in a zero-sum impact.
As you can see, there are many different ways to earn rewards. Whether a reward is taxable or not will depend on the situation at hand. Consult your tax advisor on specifics that apply to your company and program.
Updated on: 28/12/2021
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